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Wednesday, July 25, 2012

SPX, NYA, and GOLD: 1306 Still Critical to Intermediate Direction

Yesterday saw the market return to the bottom of the recent trading range. Once again, the intermediate-term seems to hang in the balance, and, once again, bears still need to knock out 1306 to be able to claim total victory of intermediate direction. Until that happens, a trip back toward the top of the range remains possible, though in a moment I'll share some observations that may help point the way.

I know no one likes to hear that things aren't crystal clear, but we've been here twice before now, and both times I've warned about 1306. The first time, I was leaning toward the view that bears would take it (they didn't); the second time, I thought the bulls would rally back up (they did) -- and now, it's moved into the "too close to call" range. So it's not unwise to await some degree of confirmation from the market, and bears who failed to pay attention to the past warnings got seriously burned.

At this stage, one should still pick stops and entries quite carefully. There appear to be five clear waves of decline at this point, so a snap-back rally to the 50 or 62% retrace level would not be unreasonable, though it's not entirely clear how deep any retracement is likely to run. This is definitely not the type of market to take lightly.

The charts continue to convey a sense of chaos. If you feel a bit like pulling your hair out, you're definitely not alone; trading ranges can be very frustrating, and that very frustration is one reason that solid breakouts or breakdowns can turn into big and fast moves. As this range completes, there are traders trapped at the edges of the range, on both sides of the trade. They hang on while the market is still in the range, and each time the market goes up or down, it traps more traders. When it finally does break decisively, all those trapped bulls (or bears) finally capitulate, and the move gains speed.

The other factor I've observed when a range breaks is the "conditioning" factor. By the fourth or fifth time a market reaches the edges of the range, people almost habitually cover shorts or sell longs. And why wouldn't they? Problem is, usually right about the time everyone catches onto something in the market, it's over... so if the pressure in one direction is significantly greater than it was before (selling or buying), the market absorbs that supply (of traders closing positions) relatively quickly, and then just resumes running. And when that happens, suddenly everyone scrambles to jump back into the trade -- which, coupled with the factor discussed in the paragraph above, adds even more fuel to the fire.

The bottom line is: this is an excellent set-up for a third wave move; now we just need to see some confirmation from the market.

I want to lead with a weekly chart of the NYSE Composite (NYA) that focusses on a level that's been an important bull/bear battleground on at least 9 prior occasions. Apparently, the market views this level (highlighted with the turquoise ovals) as meaningful: so we should too. The NYA was recently rejected at this level, and it makes sense to maintain an intermediate-term bearish bias as long as the market remains beneath that pivot.

Clearly seen in this chart is a market that's been essentially undecided for at least the prior 3 years.

The short-term NYA chart discusses some interesting factors, and the key level here seems to be 7451. Until bears claim that, a rally back up to new swing highs still remains possible.

The three wave decline looks an awful lot like a subdividing nest of 1's and 2's, but as yet there's nothing to differentiate this structure from an ABC correction (other than perhaps some other indicators, discussed later). If it's a nest of 1's and 2's, the next wave down will be extremely powerful; if it's an ABC, new swing highs are possible.

This chart clearly illustrates an Elliott Wave base channel (down-sloping, in red), and a breakdown from the channel is what separates the 1-2 nest from an ABC. A solid break of this channel and key 7451 level should lead the market into what's called an "acceleration channel." If a third of a third wave is coming, then that is the type of move one can safely chase.

The S&P 500 (SPX) short-term chart suggests a relief rally could be beginning. Again, a trip all the way back to the top of the range, or beyond, can't be ruled out yet.

The hourly chart illustrates the range-bound market:

The Dow Jones Industrials (INDU) are also still within the range, for the moment.

Many weeks ago, I cited the Dow Industrials Bullish Percent Index (BPINDU, which is a breadth indicator), and mentioned why it favors the bears intermediate term. BPINDU's past history continues to suggest that a new low below 1266 is probably in the cards.

Note that two sell signals have occured recently:

1. The index crossed beneath its 10 day moving average on a closing basis.
2. Daily MACD has crossed back down for the first time since the rally started, suggesting the rally may finally have ended.

And finally, a big picture chart of gold, which continues to coil, and should be getting close to springing a sustained intermediate move; direction to be determined by the break.

In conclusion, I remain intermediate-term bearish. Due to a number of factors (including BPINDU), it currently appears that this leg down might finally be kicking-off the real deal -- however, due to ambiguity remaining in the charts, until the key levels break, I'm still cautious, especially over the short-term; and even over the intermediate term to a degree.

Once the market begins breaking from the range directionally, I will calculate more in the way of intermediate price projections. First things first, though, and there are still key levels to claim for confirmation -- so at the moment, I'm not showing much in regards to intermediate projections because I don't want readers so focused on the "next step" projections that they forget to pay attention to simple basics, like key levels and trendline breaks. This apparently happened recently, so I'm trying to learn from that and compensate for human nature. Trade safe.

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